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Practicing Before You Swing

In This Chapter

Understanding option price changes

Practicing by paper trading

Testing an approach

Gaining strategy mastery

Baseball players take a few practice swings before they step up to the plate. What’s at stake for them might be a base hit, but when you trade, your game is all about money. So, it makes sense to try some practice trading (called paper trading) before you put real money on the line. Thus, even if you’re excited about trying new trading strategies, be careful before pulling the real money trigger. Before you trade in real terms, be prepared.

Here are three critical steps to take before using a new strategy in the market:

Understand the security’s risks and rewards

Practice strategies

Analyze a trade

This chapter is different than previous ones because it takes the leap from “learning” and “analyzing” to trading, even though it’s about paper trading. You are transitioning from concept to action.

There are two important steps. First, by monitoring different option pricing components and paper trading, you simulate ...

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